Rachel Reeves’ new National Insurance rates will make costs higher for some businesses, and lower for others
National Insurance is a tax paid by employees, employers and self-employed people in the UK. The Government uses National Insurance takings to pay for the NHS, state pension and benefits.
Before the election, the Labour Party promised to leave the tax rates for “working people” alone. Now in government, they have said they will change the rate that employers pay into National Insurance. The rate that employees and self-employed people pay will remain the same.
On 6 April 2025, the National Insurance rates that employers pay for their staff’s salaries will change in three ways. The employer rate will increase from 13.8% to 15%, the threshold for each employee will be lowered from £9,100 to £5,000, and the allowance for each business will go from £4,500 to £10,000.
The impact of this new rate varies depending on the size and nature of each business. The Government has said that the new rates include protection for small businesses, and indeed, some businesses will benefit from the changes. However, for medium or large businesses, and especially industries with a high number of staff, the changes will lead to significantly higher tax contributions.
How is National Insurance changing?
Firstly, the untaxed threshold is coming down. Currently, employers don’t pay National Insurance on the first £9,100 each employee earns each year. In 2025, that will reduce to £5,000.
Secondly, the tax rate will increase. Currently, employers pay 13.8% on each employee’s gross salary above the threshold. In April, that will increase to 15%.
Together, the reduced threshold and higher tax rate means that employer NI contributions will increase for every employee. Here’s what the changes would do to a range of salaries.
To ease the impact of the new higher NI bill on small businesses, the Government will increase the annual allowance. Currently, small businesses can claim a £5,000 allowance – effectively a discount off their tax bill. Under the new rules, all businesses will have access to a £10,500 allowance. For small businesses, this new, larger allowance will cancel out the impact of the rate increase. For larger companies, who’s tax bill could increase by millions thanks to the other changes, it will be of small comfort.
Altogether, the three changes to Employers National Insurance contribution means that for most businesses, employing staff will become more expensive. Here’s how the change will affect a few different types of business, in percentage.
For these examples, we’ve used hypothetical business cases, assigned them a typical number of staff, and applied a median salary from ONS earnings reports.
Businesses with a small payroll and low salaries, like the independent cafe and large pub, are likely to see their tax bill decrease following the change to NI. These businesses have small enough NI bills that the new £10,500 allowance (compared to the existing £5,000 allowance) means they actually save money.
For businesses with more than about 10 employees, or fewer if they receive high salaries, the change to NI will make employing staff more expensive.
Who will be affected?
All businesses with large payrolls will see their tax bill increase, but industries with a high staff-to-output ratio will find the tax increase the toughest to bear. This chart shows how many people are employed in each industry, compared to the output of the industry. The industries in red are likely to be hit hardest by the tax change.
The industries in red need a lot of staff to operate, relative to the output of the business. That means they have less 'wiggle room' when budgeting for employees, as this chart shows:
How much will the tax hike raise?
This tax hike will be the single biggest revenue raiser of Labour's autumn budget. The government expects that it will bring in an extra £20 billion a year. However, economists say that once behaviour change is taken into account, it's likely to bring in more like £10 billion.
How are businesses responding?
Medium and large businesses are expecting large increases in their tax bill after the changes come into force. The total number of employees has dropped in the past four months – it's possible that these job losses are in anticipation of the tax change in April.
Following the release of the employment statistics, Chris Williamson, chief business economist at S&P Global, said: “The loss of confidence, combined with widespread concerns over higher staff costs associated with the Budget, pushed employment sharply lower again."
